Great Year! What Next?

As usual, I'm trying to see market future based on three metrics.

Fundamentals

Usually the most important metric. And it's not clear now. On the positive side, economy is growing. Not only in US, in the whole developed world. On the negative, we have two metrics on the top of the range: S&P P/E ratio, currently 20.32, is much higher than average (about 15) and quite high for non-recession times. Profits as percent of GDP, currently above 12.5% before tax, are at all-time high. It doesn't mean that market is at the top. But to make market growth sustainable, GDP should grow faster. Fortunately, it does grow at around 3.5% last 2 quarters. In short, fundamentals are neutral to slightly positive.

Technicals

They are gr-r-r-r-r-r-reat!. Except for the fact that almost every stock index is overbought. But, as we know, overbought condition can be worked out as a function of price or as a function of time. And trend is your friend (unless it's the end).

Sentiment

Scary. I mean, the sentiment is very, I would say, extremely, bullish. I don't remember such sentiment since the end of 1998. Of course, we had one more year of huge growth left then. But it all ended bad. The only bright spot: most people are still reluctant to invest in stocks, it's still a market for professionals. So there is a room for expansion yet. But if average Joe doesn't come to the stock market soon, things might get really ugly. Because bullish sentiment usually means that there are no buyers left.

Conclusion

I write to explain to myself what I think about market. Started this article with a bearish feeling, which was helped by the fact that the last quarter of 2013 was obviously huge window dressing by (grossly) underperforming funds. But, with technicals very bullish, fundamentals neutral to slightly bullish and bearish sentiment I have to come to conclusion that things aren't that bad and we might still have bull market in 2014. Of course, a lot of things can happen and even without major events market can behave quite unexpectedly. But I think the best idea would be to be brave, take some risks and make money on the long side.

What A Year! 23.9%!

Yes, my investment accounts (not counting one pure fixed income account and retirement accounts) made 23.9% this year! Well, that's below 31.5% of S&P total, but I still have some fixed income and cash on my accounts. My long term performance (since February 1998) jumped 13.8%, which still beats Dow, S&P, Nasdaq or almost any index you can find. Maybe you can't beat the market, but I can. Well, anybody can. It's just a lot of work.

Anyway, I'm raising my champagne tonight for the New Year.

Closing Red Hat: Wrong Type Of Cloud

I closed position in Red Hat (RHT) today. Initial idea was to play on cloud, described here. But later on, I started to doubt that PaaS (platform as a service) is a way to go in the cloud. That lead to understanding that initial idea was wrong (here) and that RHT is not the way to play on cloud.

I waited for a better price through this summer and fall, decided to sell into Christmas rally. Because I didn't know the future at the time, decided to sell a half before earnings report and a half after. So it is.

Of course, after company managed to beat the estimates and pop up after earnings report, it's hard to think that decision was right. But rear view is always 20/20. And discipline trumps conviction, greed and anything else.

Yes, I took some loss on this position. Well, good gains are coming with high risk.

Disclosure: I have no positions in RHT.

Buying FIAT

I opened position in FIAT (OTC:FIATY) today. There are a lot of reasons.

First of all, I like the cars. 500 (Cinquecento) is a great small car. Fun to drive, surprisingly comfortable and shamelessly cute. On my vacation in Italy last April I drove Alfa Romeo Giulietta. Another great small car, all bells and whistles, fun to drive, beautiful and roomy. In US you can buy a version of Ala under badge of Dodge Dart. It was made longer, wider, but some of design edge was lost, unfortunately.

Yes, FIAT owns most of Chrysler. And I think that collaboration promises to create more great vehicles and more profits for shareholders.

But main reason is expected pickup of vehicle sales in Europe. Europe is coming out of crisis. The process is slow, uneven, messed up by politics, but it's going on. I expect vehicle sales to recover quite soon, because people drive cars in Europe. It might sound surprising, everybody "knows" that public transportation is so good in Europe, you don't need a car. Yeah, right. Almost every family in Western Europe has at least one vehicle, most have one for each adult member of a family. Public transportation can't beat convenience personal transportation provides.

I thought about two companies: FIAT, which is in the best financial health among European auto companies, and Peugeot (OTC:PEUGY), which is the worst. But since spring, Peugeot is up a lot, and financially doesn't look any better than before. FIAT, on other hand, is down about 10% from it's top about a month ago. So FIAT it is.

Make no mistake, no investment is sacred. I'm not sure I'll keep FIAT above 8.50. But at 7.70 (buying price) it looks great.

Disclosure: I am long OTC:FIATY.

Additional disclosure: I have no positions in PEUGY. Positions can change any time.

Great October!

No, it's not about October Revolution (1917) in Russia. It's about stock market in 2013. I spent half of the month on vacation, so I rested while my portfolio worked. I should say, it worked quite good.

What now? Who knows? I still think that we are going to have rally straight into year end. But there are problems (aren't they always?). Stocks are somewhat overvalued. GOP in Congress is determined to kill economy in order to save it. Commodity prices are still high (with exception of corn, which fell off a cliff this year). As always, market climbs a wall of worry, confusion and resistance.

So far, I didn't trade much lately. Missed most of shutdown/debt ceiling debacle, which was very tradeable, and happy about it. Picked up Restoration Hardware (RH) and DSW Warehouse (DSW) on dips.

In the couple months remaining in the year, I'm planning to do the same. Pick up whatever I can on drops. Maybe buy something I'm pretty sure about. Maybe take some profits. This market is scary and exciting, my goal is not to be scared much and keep my excitement in check.

Disclosure: I am long DSW, RH.

Additional disclosure: Positions can change any time.

Back From Vacation

I am back after some R&R. Jamaica was great, and I intentionally didn't watch or listen to any news, except weather reports. Government shutdown and threat of the default aren't good for your mental well being.

Now, this crisis was totally tradeable. Starting with beginning of October (shutdown) you could buy SPY or QQQ calls on Thursday, sell them on Friday and buy puts, selling those puts on Monday. Because market believed that deal would be made on the weekend. Yeah, right. The last trade would be to buy calls on Oct 15 and sell them on Oct 18. Because the reality of the default is so awful, people with money would not allow it to happen. Sometimes the fact that congressmen are mostly wealthy is a blessing.

The bad side of it: default is a very destructive weapon. It's a weapon of mass financial destruction, including self-destruction. As any person familiar with weapons knows, you don't play with guns. You never point a gun at something you don't want to shoot. Even if you know for sure that gun is not loaded. The fact that we have enough idiots ready to play with a weapon of mass financial destruction, is scary.

The ugly side of it. Tea Party, which supposedly started as a protest against bailouts, in reality represents ultra conservative, socially reactionary part of society. They are closely related to Heritage Foundation, which was proud of the fact that they managed to sponsor anti-gay law in Uganda. That law included long prison terms and even capital punishment for "sodomy". Now, they might be fit enough to govern Uganda, but they are not any close to US mainstream. They are losing positions every day (today's signing of gay marriage law in NJ is a good sign). The problem, as with any fundamentalists, is that they are ready for extreme measures. And if it was Tea Party choice, we would have a default.

Well, possibility of default was (and is) still remote. Life is good. I expect market to go up for the rest of the year (of course, I might be wrong). So I added to my DSW Warehouse (DSW) position today.

Disclosure: I am long DSW.

Taking Profit In Banco Santander

Took some profit in Banco Santander (SAN) today. Price shot up more than 5% after Uncle Ben (Bernanke) declared that there is no "taper" so far. Well, I like this bank, hold a significant position in it, but you don't make money if you don't take some profit once in a while. That's what I did today. This is a stock with high volatility, so I would buy more at lower prices (maybe below 7.60) and might sell even more at higher ones.

Disclosure: I am long SAN.

Additional disclosure: I am also short December 2013 puts and calls of SAN. Positions can change any times.

Adding To Restoration Hardware Position

Added today to Restoration Hardware (RH) position. The only reason I see for a significant drop in price today is a publication of 10-Q report. As far as I know, most of data in the report is a public knowledge already. And, to the best of my knowledge, Wall Street got the quarterly earnings report completely wrong. Either fund managers expected something spectacular, or they didn't like that company reinvests all profits into company growth. If latter, that's exactly what I want. Company is on a roll, rich people (and not that rich) are redecorating their houses and looking for "It!". And I don't see any other company which can provide that "It!'.

Disclosure: I am long RH.

Additional disclosure: Positions can change any time.

Out Of India, For Now

I closed my long term Indian Fund (IFN) position last week. Main reason: I don't like outlook of Indian economy for now. Country is in a squeeze: if Central Bank raises rates, economic growth will get even more slow, even recession is possible. If rates are not raised, rupee might dive even lower. Indian economy really needs end of oil subsidies, which will reduce imports and might even spoor some internal drilling. But it's a political suicide for any party at power. They can reduce gold import by imposing duties (and I applaud them for that), but it's not enough.

Thank you, IFN. It paid for itself with dividends, last couple of years I really played with house money. Maybe I'll return to it when situation in India improves.

Semi-Annual Portfolio Review

Portfolio goal. Growth. This is high beta, unapologetic growth portfolio with some safeguards and some boring investments. The goal remains unchanged.

Basic Principles. Most of the stocks in this portfolio were chosen for long term investment, which, for me, is about 18 months. Every stock is under review all the time, with a major review of the portfolio twice a year. I can trade around any position if I feel like it. The portfolio is not diversified by sectors. Diversification reduces risk, but it also reduces potential gain. No change in basic principles either.

Strategy. As I already mentioned in my blog before, political environment doesn't look good for the economy. Strategy changes: increased cash cushion, reduced long positions, more trading around positions.

Paradigm Changers. These are stocks of companies that are changing business in sectors or even in the whole world.

Google (GOOG)

Ultimate disruptor. Google is changing the advertising world. The company is also aggressively moving to mobile internet advertising.

Risk: All great empires were destroyed by internal problems. There is also a risk of search ad market saturation.

No changes since last review.

Plan: Hold, trade around.

ARM Holding (ARMH)

Pure brain company. Company designs ARM CPUs for a wide range of mobile devices and licenses them to different companies. Most smartphones and all tablet computers I know run on ARM CPUs

Sold some puts since last review.

Risk: Tech world is changing quickly, somebody can invent a revolutionary new design and beat ARMH.

Plan: hold, trade around.

Red Hat (RHT)

Company provides and supports Red Hat Linux, the most popular Linux distribution in enterprise world. Recently this OS became the most popular OS in clouds. But, as with VmWare (VMW), I'm not sure that internal clouds are winning.

No changes since last review.

Risk: high valuation requires high growth. Any slowdown can crash the stock.

Plan: reduce or liquidate position.

Facebook (FB)

The only social network company worth investing.

Traded around position since last review, with net increase in holding.

Risk: Wall Street hates the company.

Plan: hold, trade around.

DSW Inc (DSW)

Yes, retailer can be a paradigm changer. This is a great company and I like shopping there.

Reduced position since last review.

Risk: Any retailer is a high risk company. Anything can go wrong.

Plan: hold.

Restoration Hardware (RH)

Creamer's recommendation. As a part of research, I visited a local store. And liked it a lot. Company sells various home improvement stuff, mostly restored old furniture and other decorations. There is no real competitor in US, because unlike others, this company got style.

New position.

Risk: as any retailer, RH is a high risk company.

Sold since last review: VmWare (VMW), Qualcomm (QCOM), Intuitive Surgical (ISRG).

Banks / Financials

Banco Santander (SAN)

Probably the best Spanish, and maybe European bank out there. High yield, big investments around the world. Bought it because I believe in resolution of Euro troubles. This is also can be placed in International part of the review.

Added to position since last review. Also sold some options (both puts and calls)

Risk: Currency fluctuations, more problems in Eurozone.

Plan: Hold.

Steady growers / high yield. Companies with steady growth, high dividend or both. I am increasing weight of this group, such companies are best investments in depression times.

Applied Materials (AMAT)

Cramer's recommendation. He thinks that it's a spin-off candidate.

Risk: Spin-off might not happen.

Plan: Hold for a while. Sell in case of spin-off or if spin-off doesn't happen in a year since purchase.

Polaris Industries Inc (PII)

One of the best recreation equipment manufacturers out there. Local (for me) company as well.

No changes since last review.

Risks: another recession, people don't like buying discretionary items in recessions.

Plan: Hold, reinvest dividends.

3M Company (MMM)

Most innovative company in Dow Jones index. Another company headquartered in Minnesota.

No change since last review.

Risk: another recession, management mistakes.

Plan: Hold, reinvest dividends.

Diana Containerships (DCIX)

When Cramer recommended to by Diana Shipping (DSX), I did some analysis. I think material intensive growth in China is over, country is trying to change growth model to less material intensive. Which means less demand for general cargo shipping in the world (i.e. raw materials). Which, in turn, means that DSX is dead money. Not only China demand for raw materiel is not growing, but also a lot of general cargo ships have been built in the last 10 years. Less demand, more supply, no profit. I decided to go with DCIX, because it owns container ships, which should do good when trade is growing. So far, stock didn't live to expectations and I am not sure it's not a mistake.

Risk: multiple risks related to supply/demand in container ship business.

Plan: Not sure. Thinking about it.

Sold Intel (INTC) since last review.

International

Indian Fund (IFN)

India was the only part of BRIC which I liked lately. Not anymore. It looks like financial troubles of development world caught up with India as well.

No change since last review.

Risk: political, slowdown in developing countries.

Plan: Sell into strength

l'Oreal (LRLCY)

I wanted to buy cosmetics company for a while. Most of cosmetics are produced by diversified companies, which is not exactly what I wanted. I don't care about toothpaste, razors and cotton swabs. l'Oreal is a pure cosmetics company, located in France, fits the bill.

New position.

Risk: management, competition, economic downturns.

Plan: hold.

Fixed Income

I have a group of closed-end funds, which are bought when at discount to net asset value or at low premium and sold at high premium. There are two groups of funds: corporate bond funds and muni funds. There are too many of them and they are rotating too fast to present them in the portfolio review. Watch my trades on stocktalk of Seeking Alpha.

Disclosure: I am long AMAT, ARMH, DSW, DCIX, FB, GOOG, IFN, LRLCY.PK,MMM, PII, RH, RHT, SAN.

Additional disclosure: I have no positions in other stocks mentioned. Positions can change any time.

Time To Part With Intuitive Surgical

Love this company. It made me a lot of money, one of my best picks. Intuitive Surgical (ISRG) created a new industry: medical robotics. Everything was great until last quarter. Then things started going South.

I would ignore one missed quarter. I ignored a lot of quarters missed by Google (GOOG). If stock is growing fast, who cares about ups and downs? Which sometimes could be traded (and were). But... Here comes a huge BUT.

Company didn't just miss last quarter. It almost said that quick growth in US is over. And, by all indicators, it's over. The problem for company: FDA certifies it's main product, Da Vinci medical robot, for every kind of surgery separately. Prostatetomy was the first growth area. Next was hysterectomy, much bigger field. But so far, there is no new big area, approved by FDA. Company still makes a lot of money, but for P/E 23 (current) or 29 (when stock was at 500), we need growth. International growth is fast, but total numbers are small compared to US. With no growth here, total growth is weak.

I already sold part right before the earnings report. Was thinking what to do. Last straw: company declared (and then increased) stock buyback. I'm sorry, growth company doesn't do buy backs, it has better things to do with money. Even dividend would look better.

Here comes decision: close position. I sold part today and will continue selling at good price points.

Disclosure: I am long ISRG, GOOG.

Additional disclosure: I am planning to close my long ISRG position. Positions can change any time.

Why I Sold Qualcomm

I closed my Qualcomm (QCOM) position yesterday. This is a tough case. On the surface, company is great. Last quarter report was outstanding. Profit is good and growing. Dividend is over 2%. Why selling?
Because I'm buying stocks for one reason and one reasong only: to make money. Never falling in love with any stock. Never confuse a stock with a company.
Now, about negative things. Qualcomm the stock currently is below the year ago price. So, revenues and profits grew, dividend was successfully paid, and stock went (albeit slightly) down. Why? Because all suppliers of mobile components stagnated. There are two reasons for it:
1. Saturation of smartphone market. People, at least most of them, don't pay $600 for a smartphone anymore. Myself included.
2. Competition is fierce. As a result, margins tend to be low, and smartphone producers change suppliers on a fly. Sometimes Broadcom (BRCM) beats Qualcomm, cometimes it the other way around. Everybody waits for Intel (INTC) to enter this market.
My feeling is there is no growth in this stock, or any other supplier of smartphone components. The only related stock worth holding is ARM (ARMH).

Disclosure: I am long ARMH. I have no positions in other stocks mentioned. Positions can change any time.

Why I Reduced Intuitive Surgical Position

I had a bright idea today. Intuitive Surgical (ISRG) was going to report earnings tonight With the preannouncement, shares were already down and conventional wisdom would be that earnings might not be that bad as everybody thinks. I thought that actual earnings would be even worse. So I sold part of my position into a slight pop-up today.

I was right. Something is going wrong at the company. Now, it's not unusual for shares of this company to fluctuate wildly. And I made serious money on it already. I'm planning to do some extra research and decide "hold it or fold it".

Disclosure: I am long ISRG.

Additional disclosure: Positions can change any time.

Why Restoration Hardware?

I opened a new position on Friday: Restoration Hardware (RH). Bought is for the following reasons:

This is the company selling stuff to rich people. Such companies are the most successful right now.

I visited the store. I saw something other similar companies (like Pottery Barn) don't have: style. Style sells.

Company was growing fast and analysts think it will continue growing 40% a year. This is the growth I usually buy.

Price dropped lately. The reason: there were rumors of secondary offering. Reality: no secondary offering. Several big holders sold a big chunk of shares all at once. This is a discount situation, i.e. "buy, buy, buy".

As usual, I can be wrong. I'm not buying all at once. I'm not recommending anything, you are responsible for your money.

Disclosure: I am long RH.

Additional disclosure: Positions can change any time.

Market Outlook: All Clear? Not So Fast

Last time i wrote about market outlook, I felt gloomy. A pity I didn't act on my feelings. A lot has changed in three weeks.

Fundamentals. Still suck. Inflation is inching lower, and if anybody thinks that 1.7% (official number) or 1.5% (market anticipation based on difference between 10-year treasuries and 10-year TIPS) is good, well, they probably don't need a job. Of course, mumbling Fed didn't help things, it helped somebody to orchestrate huge bear raid on all fixed income. I didn't believe that those somebodies wanted to break the Fed. But two comments persuaded me in the opposite: Rick Santelli said last week, as an off-cuff comment, that bear raid on Treasuries looks stupid, unless Fed is broken, like Bank of England in 1992. Another comment by Richard Fisher (head of Dallas Federal Reserve) was: "You can't break the Fed". Which just tells me that somebody wanted exactly that. I don't know if such bear raid is illegal (it would be on a stock market), but the size of it is scary. And, of course, I'd like to know the conductor.

In other fundamental news: 2013 1Q GDP revised down, a lot, to under 2%. That's huge. Market took it as a good news, counting on Fed not to end QE any time soon. Well, I have no doubt in QE forever, or at least for the next 10 years, which is the same in investment outlook.

Technicals. Not good. The only good technical signal comes from VIX index: it railed to make a new high on Monday, when indices made a new low. But so far S&P failed to get over 50-day moving average. And yesterday 13-day MA crossed below 50-day. In the last 5 years, every time such cross happened, bear market (or correction, whatever you call it) continued until 13-day MA started rising. During this rally, which started in January, S&P ran over 50-day MA all the time, every attempt to cross it was a buying opportunity. Now 50-day MA is a resistance instead of support. History tells us that we have at least couple of weeks more of jitters before (if) bull market starts over again.

Sentiment. Good. I mean gloomy. But being a contrarian indicator, it's good.

If my feelings are right, we have several stormy weeks ahead. Watch Treasuries and 50-day MA on S&P.

The Street Gold Event: Shame On Cramer

I want to repeat again: I really like Jim Cramer. He made me a lot of money and I hope for more. But sometimes he falls in love with a stock, or a person, or an asset class and his view is clouded.

Great example: yesterday I watched webcast on thestreet.com. The headline was: "Gold: Dead Cat Or Raging Bull". I was hoping for in-depth analysis of gold as an investment. Boy, was I wrong!

It was not a discussion. There was a bunch of gold bugs on this show, Cramer is the least shameless of them. Each one pimped gold as the only way to avoid hyperinflation which is supposedly created by Central Banks of the world. There was not one skeptic on this show, never mind outright gold bear.

Their arguments and my response:

A. Central Banks are printing money and it will cause hyperinflation

R. Inflation expectations are discounted by market at 1.5% for the next 10 years. In other words, Central Banks are not printing (and what's more important, are not going to print) enough money for normal 2% inflation.

A. World is going to catastrophe, gold is the only asset in such case.

R. If so, food, arable land, weapons and ammo are much better investments

A. Central Banks are manipulating markets and one day it will end with everybody buying gold.

R. Never fight the Fed. Everybody who did ended miserably.

To Jim Cramer: discussion means collision of different points of view. When you have only one point of view on your show, it's not a discussion.

Gold is down again, now below $1230.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

How Many Idiots Are Happy Now?

I've heard a lot of cries about low interest rates. The main theme was that people don't earn enough on their fixed income. Well, interest rates are up. A lot (0.9% on 10 years threasuries in 3 months - that's a lot). Of course, fixed income principal is down, a lot. So much, that you need several years of income (even at higher rates) to make it even.

So, fixed income idiots, are you happy now?

Buying Cosmetics

I opened position in L'oreal (LRLCY.PK) today. Two reasons: I wanted into cosmetics and I wanted into Europe. L'oreal is one of the best (some think the best) cosmetics company in the world, and it doesn't have much pharma exposure, unlike many other cosmetics. Today's panic looked like a good time to start a position. As usual, I might be wrong...

Disclosure: I am long LRLCY.PK.

Additional disclosure: Positions can change any time

Oil: Pattern Changed

Oil (both WTI and Brent) had a set pattern last couple of weeks. Was going down overnight and then up after US markets open. Today pattern was reversed: oil up overnight and going down since 10 AM EST.

I traded this pattern several time. Today it was a loss. Well, let's wait for another pattern to emerge.

Possible tools to play if you don't have futures account (I qualify but prefer to trade on the safer side with ETFs):

USO (long WTI ETF)

DTO (double short ETN)

SCO (double short ETF).

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DTO over the next 72 hours.

Additional disclosure: Positions can change any time.

Changing Trends, Continued

New trends are settled. I wrote in March that:

Reverse dependency between dollar and asset classes is broken.

Commodities are flat or down.

Stocks are up.

Bonds are up.

The only change since is in bonds: they are down hard. 10 years Treasury yield is well above 2%, again. Don't know if this new trend continues, don't see any reasons for it.

What can we deduce from these trends?

Power definitely shifted to equity. In more broad terms, power shifted to more risk for more return. This is a good trend. Now, I would be glad if that happens, because in the long term, stock market is on the way to the new long-cyclical bull market (average 35 years cycle). The only thing which bothers me, bullish stock market is only supported by valuation expansion, not by fundamentals. Oh well, whatever works. Can't complain when most of my money is in stocks.

Another trend of last couple of months: Europe stock markets are up, a lot. If Europe repeats US path, that means that in about 4 months we are going to see end of recession there. Not sure if it's true, but if it is, great. I'm looking for good investments in Europe. That's beside my position in Banco Santander (SAN), which is OK, but doesn't shine.

Another change from beginning of year: we are back to ETF market. In the beginning of year, it was mostly funds market. It was quite obvious when big funds were buying huge amounts of stocks. Now we see that most of buying starts with big ETF buys. And it's all markets, equities is just one of them. Same picture is obvious in commodities and bonds. Maybe it's because markets are thinner and more trades are done by tradebots? No idea, your guess is as good as mine.

Commodities are still going down. All of them. Something still keeps oil above the water. Gold kinda stabilized around 1400. Everything else is down. Agros, metals, natural gas (after runup in January-March). For me, it means that most traders came to their senses and don't believe in big inflation ahead (never mind hyperinflation).

Every trend above is great for stocks. I'd like to see fundamental support for the stock market, but I'm taking every buck market gives me. With gratitude. The only problem here: you can't expand valuations indefinitely. Economic growth should support stock market, or we are up for another crash.

Disclosure: I am long SAN.

Additional disclosure: Positions can change any time.